FTX collapse causes quant traders to flee crypto markets

The collapse of FTX has sent chills through the crypto market, causing both large and obscure quant funds to either shrink their positions or close shop entirely. This situation seems to open up profitable opportunities for those still daring to trade.

Price disparities returning to crypto markets

“If you know what you’re doing and you have your money on exchanges, there are very profitable places to trade,” said GSA Capital crypto strategist Chris Taylor.

Prices for identical crypto assets are showing clear divergence on different platforms. This is a sign that the aftershocks of the FTX fall are still being felt across the crypto trading space.

For example, a Bloomberg report indicates the funding rates of similar BTC futures on OKX and Binance have shown a gap as high as 101 percentage points and as low as ten percentage points. This is a significant change from the single-digit gaps recorded for most of October on the same exchanges.

In the old days, the crypto market was filled with inefficiencies that speculators took advantage of to make easy money. They purchased a crypto asset from one exchange and sold it for a profit on another. 

This strategy had become untenable as more sophisticated players entered the crypto market and deployed systematic trading methods that had proved successful for conventional asset classes. These strategies, which included options writing, futures trading, and price arbitrages, caused the differences previously enjoyed by speculators to shrink to barely profitable levels.

Quant traders most affected by FTX implosion

But the implosion of FTX, with its array of trader-friendly features, including margin lending and a wide choice of derivatives, seems to have affected the new breed of crypto traders much more than any other crypto collapse this year. 

More and more companies are coming out to state their losses. According to the Financial Times, Galois Capital, a hedge fund founded by Kevin Zhou, has more than half its capital stuck on FTX. Another firm, Ikigai, hemmed by former Point72 employee Travis Kling, also has most of its assets on the bankrupt crypto exchange. 

On its part, Wintermute, one of the largest market makers in the crypto space, has said it has about $55 million worth of crypto assets locked up on FTX.

And the prices of leading cryptocurrencies haven’t been spared either. BTC, for instance, has dropped by an additional 21%, bringing its 2022 losses to an eye-watering 65% from its all-time high.

The fall of FTX means that more traders will now want crypto to resemble traditional hedge funds more and more. Some crypto market observers opine that big players will try to find ways not to put up collateral on centralized exchanges (CEX) and instead look to leverage counterparties, including prime brokerages.